I am moving to the UK in September from the US (I'm a US citizen).
I'm traveling with my wife who will be studying there for 3-4 years.
I'm an employee of a US company, and I work from home. So nothing
will change in my work situation -- I'll take my laptop and work from
there. Also, my wife will be paid a monthly stipend by the US
government, which is funding her study. So, all our income is from
the US, but we'll reside in the UK all year (except vacation) and we
won't maintain a US residence.
-I believe that we have to file US income tax regardless. Will we have
to file UK income tax?
-Which country do we pay income tax to?
-Which country do we pay Social Security type taxes to?
-Do we need to have taxes withheld from our paychecks or pay estimated
tax to either country?

Hi monax,
You will be taxed by the US govermment on your income. All US
citizens, regardless of residence, are taxed on their worldwide
income. This is different than most countries. Since you will be
working for an American employer, you will also be subject to Social
Security and Medicare taxes.
http://helsinki.usembassy.gov/acs/irsinfo.htm
"All U.S. citizens and green-card holders are required to file a U.S.
Income Tax Return each year regardless of where they are living and
paying taxes. There are, however, provisions to avoid double
taxation."
You will also be a UK resident, as defined by the tax laws:
http://www.hmrc.gov.uk/pdfs/ir20.htm#part1
"1.2 To be regarded as resident in the UK you must normally be
physically present in the country at some time in the tax year. You
will always be resident if you are here for 183 days or more in the
tax year. There are no exceptions to this."
And you will be liable for UK tax:
"Part II Liability to UK tax
5 Earned income
Basis of liability
5.1 If you are resident in the UK under the rules in Part I of this
booklet, you will normally pay UK tax on all your earned income,
wherever it arises...You may, however, be entitled to a reduction in
the UK tax you have to pay if you receive overseas earnings and spend
long periods abroad (see paragraphs 5.9 - 5.10) or if you receive an
overseas pension (see paragraph 5.11). In certain cases where you are
resident but not ordinarily resident in the UK, or resident but not
domiciled here, we will deal with your overseas income on the
‘remittance basis' (see paragraphs 5.9, 5.11 - 5.12)."
Now, this "domicile" concept is an abstract concept which basically
means your home. Not your place of birth, but your home. For example,
if an American soldier has a child in Japan, the child's domicile is
not Japan, but America, since the soldier's home is in America. Since
you plan to return to America one day and not stay in Britain forever,
you are domiciled in America. This might have tax implications for
you, also, so it's an important concept to know.
For your case, you will be a UK resident but not UK domiciled.
According to Wikipedia:
"In the UK such individuals have a special tax status which limits
them to paying tax on income and gains from UK sources, and on foreign
income and gains which are remitted to the UK."
http://en.wikipedia.org/wiki/European_Union_withholding_tax#UK_Resident_but_not_UK_domiciled_individuals
You would fall under the "foreign income and gains... remitted to the
UK" category, and thus would owe taxes to the UK government.
This page has details on how you would be classified as a UK resident.
http://www.ustaxfs.com/pages/main3.asp?section=main&page=case_studies
"If you come to the UK for at least two years but less than 3 years
and you do not buy or acquire a home under a lease of 3 years or more,
you will be regarded as being resident but not ordinarily resident
(R/NOR) in the UK from the day of your arrival.
Where you have been R/NOR and you change your intention after your
arrival, such that you now intend to remain for over 3 years or you
buy or acquire a home under a lease of 3 years or more, you will be
regarded as becoming resident and ordinarily resident (R/OR) from the
6 April preceding the change in intention. If you stay on in the UK
after the third anniversary of your arrival without having made a
formal change of intention, you will be regarded as R/OR from the 6
April following that anniversary."
These are also interesting points:
"If you are resident and ordinarily resident but not domiciled in the
UK, you will be taxable on your worldwide employment income (but see
below) and on your other UK source income and gains on an arising
basis and on your overseas investment income and gains only to the
extent that such income is remitted to the UK.
The exception to your worldwide employment income being taxed on an
arising basis is where you have an employment with an overseas company
and all of the duties of that employment are carried on outside of the
UK. In this case the income would be taxable on a remittance basis
only.
Tax Compliance
If you are working in the UK, your host employer in the UK will
generally have an obligation to account for UK tax through UK PAYE
withholding. You may be required to file a UK tax return each year.
Husbands and wives file separate tax returns in the UK."
According to this page:
http://www.hmrc.gov.uk/feu/faqs.htm
the UK withholding tax is 22 percent of income earned in the UK. They
will give you a certificate to give to the US to prove that you paid
the taxes.
The British have a system to pay income taxes called PAYE (Pay As You Earn).
Here's some information on it:
http://www.adviceguide.org.uk/n6w/index/life/tax/the_pay_as_you_earn_paye_system.htm
"The Pay As You Earn (PAYE) system is a method of paying income tax.
Your taxpayer?s employer deducts tax from your wages or occupational
pension before paying you your wages. Wages includes sick pay and
maternity pay. This means that you pay tax over the whole year, each
time you are paid. Your employer is responsible for sending the tax on
to HM Revenue and Customs."
Since you have a US employer, they may or may not participate in the
PAYE system for you. You would have to ask the human resources office.
If you don't participate in PAYE, you could save the taxes as you go
and pay them when they're due. But you would definitely have to
contact them in order to just have your Social Security/Medicare taxes
withheld, instead of your regular income taxes that you're paying now.
Here's another page on the subject:
http://www.ustaxfs.com/pages/main3.asp?section=main&page=case_studies
"The US does give some special exemptions for people working outside
the US and there is also a system of tax credits so that you do not
pay tax on the same income in more than one territory.
Generally it is likely that your US tax liability will be
substantially reduced during your time abroad.
If you are subject to tax in the UK, UK tax will generally be
accounted for via Pay As You Earn withholding (PAYE). If you remain
on a US payroll, you will need to arrange to reduce your US
withholding in order to minimise cash flow problems."
This is a link to an IRS office in London:
http://www.usembassy.org.uk/irs/
They have lots of helpful information.
Fortunately, both countries have tried to avoid the problem of double
taxation for their citizens-- in 2001, the US and UK signed a treaty
governing double taxation that went into effect in 2003. The text of
it is here:
http://www.ustreas.gov/offices/tax-policy/library/uktreaty.pdf
The UK Government sums up the treaty here:
http://www.hmrc.gov.uk/bulletins/tbse6.pdf
In fact, the UK has treaties with over 100 countries about the
taxation issue. Her is the British government's page on the subject:
http://www.hmrc.gov.uk/cnr/app_dtt.htm
"If you have income from a source in one country and are resident in
another, you may be liable to pay tax in both countries under their
tax laws. To avoid 'double taxation' in this situation, the United
Kingdom has negotiated double taxation (DT) treaties with more than
100 other countries. Each treaty is called either a 'Double Taxation
Agreement' or a 'Double Taxation Convention', depending on the wording
of the treaty."
You will have to fill out an application to benefit from the service:
"Relief from UK tax provided in a DT treaty is not automatic. Treaty
benefits must be the subject of an application to HM Revenue & Customs
(HMRC). Only the overseas person receiving the income can make a valid
application."
The forms can be found here:
http://www.hmrc.gov.uk/cnr/usdownload.htm
The treaty states that you can deposit income from your residence in
the UK to a US 401k or retirement plan and not be taxed by the UK.
(You're not taxed in the US until you take the money out.)
http://taxationweb.co.uk/internationaltax/ustax/article.php?id=150
The taxation treaty states that wherever you are resident is where
your earnings will be taxed. Therefore, your taxes will presumably go
to the UK. The US will tax you on the earnings too, but there is a
"foreign tax credit" which might be able to relieve you of part of
your US burden for the UK taxes you paid.
http://www.wwwebtax.com/credits/foreign_tax_credit.htm
"You can claim an itemized tax deduction for foreign taxes paid on
your tax return, or you can claim the foreign tax credit on your tax
return, which is intended to reduce the double tax burden that would
otherwise arise when foreign source taxable income is taxed by both
the United States and the foreign country from which the taxable
income is derived.
Generally, only income tax paid or accrued to a foreign country or a
U.S. possession qualify for the foreign tax credit on your tax return.
Under certain conditions, however, tax paid or accrued to a foreign
country or U.S. possession in lieu of an income tax will qualify for
the foreign tax credit on your tax return. You may not claim a foreign
tax credit or tax deduction on your tax return for tax paid on taxable
income not subject to U.S. tax."
You qualify for the foreign earned income exclusion by living outside
of the US for more than 330 days of the year. You are only eligible
for the foreign tax credit if you pay foreign tax on the income. Since
the income will be from America, it is not foreign-sourced income and
there is a possibility that the US might take first precedence over
your income taxes. However, under Form 2555 (discussed later) you
seem to be exempt from US taxes up to $80,000. Therefore, you really
will have to consult with a professional to confirm.
http://www.contractoruk.com/overseas_guides/it_contracting_usa_moneytax.html
"In some cases, it would be beneficial, from a tax standpoint, to
claim exemption under a Double Tax Treaty, i.e., if your other country
of tax residence levies much lower taxes, e.g., as with, perhaps,
Singapore. In other cases, whilst the tax liability may be broadly
similar, as with, perhaps, the UK and Germany, particularly with
higher levels of income but depending upon any US State and City taxes
also due, claiming exemption under a Double Tax Treaty offers
administrative convenience and savings in professional fees (payroll
bureau, tax return filing etc). You will need to seek specialist tax
advice from a US accountant or tax lawyer as regards any need to
submit a formal claim for relief under the particular Double Tax
Treaty concerned. Apart from the 183 day rule, the other criteria for
obtaining relief are that you are paid by a non-US company and that
the costs of your employment are borne by a non-US company. You should
not, generally, have a problem satisfying these criteria."
However, it seems that Form 2555 from the IRS will exempt you from
paying taxes on up to $80,000 of income, with the federal earned
income exclusion.
The federal earned income exclusion also may exclude you from having
income tax withheld by your US employer, according to the IRS.
http://www.irs.gov/publications/p54/ch02.html
"Income Tax Withholding
U.S. employers generally must withhold U.S. income tax from the pay of
U.S. citizens working abroad unless the employer is required by
foreign law to withhold foreign income tax.
Your employer does not have to withhold U.S. income tax from any wages
earned abroad that you can reasonably be expected to exclude under
either the foreign earned income exclusion or the foreign housing
exclusion."
You will have to inform the company you work for, so that they can
stop withholding taxes from your salary (besides Social Security and
Medicare).
This can be seen here:
http://www.irs.gov/publications/p54/ch02.html#d0e1754
"If you are a U.S. citizen or resident and this tax is withheld in
error from payments to you because you have a foreign address, you
should notify the payer of the income to stop the withholding. Use
Form W-9 to notify the payer.
You can claim the tax withheld in error as a withholding credit on
your tax return if the amount is not adjusted by the payer."
And referring to the foreign tax credit:
"Foreign tax credit. If you plan to take a foreign tax credit, you
may be eligible for additional withholding allowances on Form W-4. You
can take these additional withholding allowances only for foreign tax
credits attributable to taxable salary or wage income."
Explanation of Form 2555:
http://www.esmarttax.com/help/FED/i2555.htm
The form itself:
http://www.irs.gov/pub/irs-pdf/f2555.pdf
from misc.taxes.moderated:
"If the work is actually performed outside the U.S. and the person's tax
home is outside the U.S., up to $80,000 of earned income may
be excluded from taxable income. Taxpayers must file a
return and include Form 2555 to make the election to take
this exclusion.
Your friend should file Form 673 with his employer to avoid
withholding of U.S. income tax. If he is a bona fide
resident of another country, he should make appropriate
arrangements to pay any tax due to that country on this
income.
As long as your friend is working for a U.S. employer there
is no way to avoid the Social Security and Medicare taxes.
These taxes are not optional for citizens."
Further information on the Social Security and Medicare taxes:
http://www.ustaxfs.com/pages/main3.asp?section=main&page=case_studies
"If you come to work in the UK for a period of up to 5 years and
remain employed by your US employer, you can stay covered by US social
security (FICA) and would not have to pay UK social security (National
Insurance).
Your employer needs to obtain a certificate of coverage from the US
Social Security Administration to demonstrate to the UK Contributions
Agency that you remain covered under FICA.
Whether or not you are covered under FICA you will still need to
obtain a national insurance number."
That page also has several other interesting facts that would pertain
to you. You'll need to acquire a UK work permit, your US driver's
license is good for a year there, and you'll have to register with an
NHS doctor to be eligible for service from the NHS.
The foreign earned income exclusion is detailed by the IRS here:
http://www.irs.gov/publications/p54/ch04.html
In addition, you'll have to file a change of address with the IRS. The
forms can be found here:
http://www.irs.gov/pub/irs-pdf/f8822.pdf?portlet=3
and here's the IRS publication for "US Citizens and Resident Aliens Abroad"
http://www.irs.gov/publications/p54/index.html
On a side note, the issue of having a "non-UK domicile" has provoked
controversy in England because many wealthy British people with
origins in another country, but British homes and passports, have used
it to get out of paying income tax. The article is from 2002.
http://www.expat2u.com/good.asp
Coincidentally, The Economist just published an interesting article
about this subject, calling for the abolition of collecting taxes from
foreigners abroad.
http://www.economist.com/business/displayStory.cfm?story_id=7081335
To sum up:
"-I believe that we have to file US income tax regardless. Will we have
to file UK income tax?"
Yes.
"-Which country do we pay income tax to?"
Probably, you will pay the UK and earn a tax credit from the US. But
you will have to check with your company/a professional as I don't
know the statistics of your case.
"-Which country do we pay Social Security type taxes to?"
The US.
"-Do we need to have taxes withheld from our paychecks or pay estimated
tax to either country?"
The US will withhold Social Security and Medicare taxes from your
paycheck. If you will be paying UK income tax, they should do it
through a system called PAYE if your company has the ability to comply
with this system. If not, you would pay once a year, when the taxes
are due.
Search terms:
income tax us citizen uk
foreign tax credit
income tax us citizen uk
double taxation us uk
uk resident uk domicile
paye
paye us citizen
In order to find out the full legal ramifications of the double
taxing, you'll have to find a professional, as Google Answers cannot
provide legal advice. But I hope that I have helped to steer you in
the right direction and answered your questions. If you need any
additional help or clarification, let me know and I'll be glad to
help.
Good luck in England!
Cheers,
--keystroke-ga

Comments

Subject:
Re: US/UK taxes
From:
abezon-ga
on
24 Jul 2006 21:21 PDT

I'd also check whether your visa status in the UK (spouse of a
student) allows you to be treated as a student for residency purposes.
(It does in the US.) Students who will be in the UK for 4 years or
less are classified as resident/not ordinarily resident and not
domiciled in the UK. They are subject to tax only on income remitted
to the UK. Also, your wife will also be able to exclude her first
year's stipend from UK taxes under the tax treaty.
General residency topics in UK:
http://www.hmrc.gov.uk/pensioners/tmanon-residency.shtml

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